Tech on the Side: Microsoft corrects past mistakes
Apr 4, 2014

Tech on the Side: Microsoft corrects past mistakes

In a world where tech companies are forced to make difficult decisions between mutually exclusive business models, it can be hard to know whether they decided correctly. For instance, did Google make the correct choice to release Android on a less-than-free model (which has been obviously successful), or did they make one of the biggest blunders in tech by not selling Android for a fee (which could have been worth far more)? When a company tries one option and then reverses course after it proves a failure, however, we get a rare glimpse to be able to compare the options and say the one was objectively a failure. 

It is precisely such a reverse course that Microsoft has done in the last week. Firstly, they have released Office for iPad. Secondly, they are giving away Windows for phones and tablets under 9" making them even cheaper for OEMs than Android (as Android phones give hefty royalties to Microsoft). 

What underlies this shift is a choice between two rather different business models. The desktop Windows business model was that you sold software for a nice fee, and simply needed to keep your advantages (such as an entrenched and trained user base, enormous number of apps, useability, etc) sufficient to keep the free alternative (Linux) at bay. Most of those "moat" advantages reversed themselves going to Android instead which had all the apps and all the users, and left Windows on mobile in fairly dire straights. 

Microsoft had a choice when it came to mobile. They could either keep their old business model (selling Windows for a fee) only applying it to mobile. Or they could radically change their business model, matching Android's price and competing instead on features, trying to profit in some way services (much the way Google profits when people use its services and the advertising they provide). They chose the former. That clearly didn't work, so now they are trying the latter. 

While Windows Phone and Windows 8 for smaller tablets were floundering, Microsoft tried to bolster support for its mobile OS in two ways. Firstly, it started releasing its own hardware in the Surface, and later in the purchase of Nokia. If the other OEMs were not going to be providing the compelling products for mobile Windows, then they would have to lead the way. 

Secondly, they made the tactical decision to keep Office to themselves. Since Office is obviously an enormous competitive advantage, by only putting it on Windows tablets (so, effectively, just the Surface), and by making a quality hardware product themselves, they basically formed the a product that had a compelling use case and reason to purchase. It might have worked, but it didn't. There just wasn't enough momentum in the business strategy. 

It is a trade off between different divisions. When it is was being constrained, the Office division was making less money in the hopes to bolster the Windows division. Now the Windows division isn't making much money in mobile, but Office 365 and other services will go up, as the ability to use them on iPads (and presumably Android tablets in the future) widens their appeal. 

These plans were announced this week, under new CEO Satya Nadella, but were almost certainly decided at least by the time of the Nokia purchase. As in, when they bought basically the only hardware company on the planet with a business in Windows Phone, they already capitulated on the idea of profiting off the sale of the software. Doing the timing now helps drive the narrative of Nadella bringing a breath of fresh air to the company with bold new changes of direction, even if those changes were already baked into the cake. And of course, development on the Office for iPad apps (which mercifully seem excellent) was done over considerable time. 

Rightly or wrongly, Microsoft in the last half decade has made many bold moves, and this is another one. They chose one business plan, and when it didn't work, they (unlike, say, Blackberry) were able to make the shift to a new one. We can now say with a rare certainty that the original decision was objectively wrong in the sense that given how they abandoned it, they would be much better off had they released Office for iPad and started giving away Windows mobile products for free several years ago. Time will tell if the new strategy actually works out. But at least they are now positioned such that it might work out. 

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